Pages

Thursday, October 30, 2014

Brasil Raises Interest Rates To Three Year High




October 30, 2014 12:35 am

Brazil raises rates to three-year high

Re-elected Brazilian President Dilma Rousseff©EPA
Brazil’s central bank raised interest rates on Wednesday to their highest level in three years, in its first monetary policy meeting since President Dilma Rousseff won a second term in elections on Sunday.
In a move that also follows a more hawkish statement from the US Federal Reserve, Brazil’s central bank increased its benchmark Selic rate by 25 basis points to 11.25 per cent, surprising analysts who had predicted no change.
“The intensification of relative price adjustments in the economy turned the balance of risks less favourable towards inflation,” the monetary policy committee said, in a decision seen as partly aimed at tackling the inflationary fallout of a weakened exchange rate.
Disagreement over Brazil’s interest rates, which are among the highest in the world, was one of the battlegrounds of the election.
Ms Rousseff and her centre-left Workers’ party had argued that, should Aécio Neves, the pro-business PSDB party candidate, win the election, he would raise rates so high to quell inflation that he would cause a recession and high unemployment.
The comments sparked concern following Ms Rousseff’s victory that Brazil’s central bank would be under pressure to be dovish with inflation, which is hovering slightly above its target range of 4.5 per cent plus or minus 2 percentage points.
“The biggest challenge facing the re-elected Rousseff administration will be to put in place policies to strengthen the growth outlook and reduce inflation while addressing social pressures,” said Standard & Poor’s in a note this week.
But the decision to increase the Selic so soon after the election showed a greater determination on the part of the central bank to anchor inflation expectations than forecast, economists said.
“It’s a great leap forward to establish the credibility of the inflation-targeting framework,” said Alberto Ramos, economist with Goldman Sachs, predicting the Selic could rise to 12-12.5 per cent.
The biggest challenge facing the re-elected Rousseff administration will be to put in place policies to strengthen the growth outlook and reduce inflation while addressing social pressures
- Standard & Poor’s this week
He said a key factor in the decision was likely to have been the softer Brazilian real, which was trading at R$2.46 against the dollar on Wednesday after weakening sharply following Ms Rousseff’s re-election. Official assumptions had predicted it would stay at about R$2.25.
A Reuters poll of 43 economists had predicted no change in the Selic rate, which had stood at 11 per cent since April.
The full reasoning for the central bank’s decision will be contained in minutes to be released next week.
But the short statement issued on Wednesday night said the decision was not unanimous, with five members of the monetary policy committee voting for the rate increase and three against.